The Troubling Price Tag of the Inflation Reduction Act’s Green Energy Tax Credits
The price tag of the Inflation Reduction Act’s green energy tax credits is significantly higher than initially anticipated. Recently, the Joint Committee on Taxation (JCT) provided a preliminary new score of the credits, revealing a staggering cost of $663 billion from 2023 to 2033. This figure is a substantial increase from the previous estimate of $570 billion in April, which did not include the electric vehicle credits. Moreover, it is more than double the original estimate of $270 billion made by the JCT in August of the previous year for a ten-year period. These revised numbers indicate that the Inflation Reduction Act fails to achieve its intended purpose of reducing deficits.
Initially, the Inflation Reduction Act (IRA) held various implications for different groups of people. When it was being debated in Congress last August, the primary selling point of the act was its potential to mitigate inflation by reducing deficits. The Congressional Budget Office (CBO) and the JCT initially projected a deficit reduction of approximately $260 billion over ten years, which amounted to around 1 percent of the projected $18 trillion in deficits under existing laws during the same period. However, shortly after its enactment, the Biden administration began marketing the IRA as the “most significant climate legislation in U.S. history” due to the extensive range of tax credits aimed at green energy technologies.
The Biden administration’s effort to position the IRA as a substantial climate investment always contradicted the original deficit reduction idea. Over time, it became apparent that certain provisions within the credits could significantly increase their budgetary cost. For instance, the bill permits transferability between taxpayers, allowing the credits to be fully monetized. Additionally, loosely defined legislative language has granted the Biden administration’s Treasury Department the ability to expand eligibility and utilization through regulatory guidance.
An example of such expansion is the recent Treasury ruling that enables taxpayers to bypass the eligibility limits for the $7,500 electric vehicle (EV) tax credits. Congress originally designed these rules to prevent individuals with earnings exceeding $300,000 from accessing the credits, further limiting their application to vehicles priced below $55,000 and SUVs and trucks priced below $80,000. However, Treasury’s ruling exempts leased vehicles from these limits, resulting in a significant increase in EV sales through leasing. In fact, leasing now accounts for approximately 34 percent of EV sales, a stark contrast to the 7 percent reported last September.
Martin Sullivan, Chief Economist at Tax Analysts, compared the JCT’s changing revenue estimates for each credit and discovered substantial growth in various categories. The EV credits saw a staggering 524 percent increase, rising from $11 billion in the original estimate for the period 2023 to 2031 to $69 billion for the same period. Similarly, the credit for carbon oxide sequestration grew by 439 percent, the advanced manufacturing production credit by 333 percent, and the Section 48 investment credit by 330 percent. Overall, the cost of the IRA credits grew by 103 percent for the period 2023 to 2031. The JCT attributes this cost escalation to factors such as the Treasury’s expansive guidance and the anticipated increase in battery and renewable energy production capacity.
Despite the JCT’s revised credit score, it remains lower than estimates from external experts. Researchers at the Brookings Institution estimate the cost of the credits to be closer to $1 trillion over ten years, suggesting that the IRA as a whole increases deficits by several hundred billion over the same period. Therefore, it becomes imperative for the JCT and CBO to conduct a comprehensive reassessment of the entire IRA, providing lawmakers and taxpayers with a clear understanding of the situation.
Let’s explore some key insights we have gathered about the Inflation Reduction Act:
- Deficit Reduction Illusion: The Inflation Reduction Act does not effectively reduce deficits and may even contribute to their increase.
- The Burden of Energy Credits: The escalating costs of the IRA can be primarily attributed to the energy credits, underscoring the dangers of open-ended budgeting.
- Wealthy Individuals as Beneficiaries: The energy credits favor affluent individuals who prefer luxury climate-oriented goods, including expensive electric vehicles (EVs) and solar panels.
- Corporate Advantages: The energy credits also benefit large corporations. Analysis by the Joint Committee on Taxation revealed that corporations with gross receipts exceeding $25 billion in 2020 received a significant portion of the Section 48 Energy Credit (53 percent) and the Section 45 Credit for Electricity Produced from Certain Renewable Resources (62 percent).
- Income Inequality: Distributional analysis of the energy credits indicates that high-income earners are the major beneficiaries. For instance, according to the Tax Policy Center’s analysis, the top 1 percent of earners in 2027 will receive a benefit of over $11,000, resulting in a 0.5 percent increase in their after-tax incomes. In contrast, the bottom quintile of earners will only experience a benefit of less than $100, raising their after-tax incomes by 0.3 percent.
- Complexity and Compliance Challenges: The energy credits contribute to the complexity of the tax code, creating confusion and increasing compliance costs for taxpayers, while also posing administrative challenges for the IRS.
- Uncertainties and Compliance Costs for Businesses: The tax hikes included in the IRA, such as the book minimum tax and stock buyback tax, introduce uncertainties and compliance costs for businesses. The book minimum tax lacks a well-defined tax base and requires extensive regulatory guidance and taxpayer comments to navigate. Meanwhile, the rollout of guidance continues while businesses face new tax liabilities, and unresolved issues, such as the impact on small partnerships, may need to be resolved through legal proceedings. Similarly, the stock buyback tax, although aimed at perceived problems in corporate finance, is becoming a means for the administration to selectively penalize certain types of companies and impose additional compliance burdens.
- International Implications: One unanswered question regarding the Inflation Reduction Act’s green energy tax credits is whether taxpayers would benefit from them at all. Many countries have adopted global minimum tax rules that allow for top-up taxes when a company’s effective tax rate falls below 15 percent, even if the low-tax income is generated beyond the enforcing country’s borders. If the credits are included in this calculation, their value could be offset by tax increases in countries that have embraced the minimum tax. Thus, the United States would be providing a credit while another country gains more tax revenue through the top-up tax.
Considering the circumstances, repealing the green energy tax credits of the Inflation Reduction Act would be a step in the right direction. It would not only improve the tax code but also substantially reduce deficits. Lawmakers seeking to address climate change should explore more fiscally responsible alternatives, such as implementing carbon pricing measures like a carbon tax. Carbon pricing is a widely used and effective approach adopted by 47 countries, and it generates significant tax revenues.
While lawmakers have temporarily resolved the debt ceiling issue and managed to control short-term deficits to some extent, there is an ongoing debt crisis that will intensify in the coming years due to unsustainable budgeting practices, including spending through the tax code and uncontrolled entitlement spending. Addressing the debt crisis requires politicians to set aside political slogans and communicate openly with taxpayers about the factors driving the debt and the proven strategies to effectively tackle it. This includes recognizing when past legislation, such as the Inflation Reduction Act’s green energy tax credits, has become excessively costly to maintain.
Source: https://taxfoundation.org/